Ponzi Scheme

"A Ponzi scheme is a fraudulent investment operation that pays returns to it's investors from their own money or the money paid by subsequent investors, rather than from profit earned by the individual or organization running the operation. Operators of a Ponzi scheme usually entice new investors by offering higher returns than other investments, in the form of short-term returns that are either abnormally high or unusually consistent.

The perpetuation of the high returns requires an ever-increasing flow of money from new investors to sustain the scheme."

Carlo Pietro Giovanni Guglielmo Tebaldo Ponzi, (March 3, 1882 - January 18, 1949), commonly known as Charles Ponzi, was an Italian businessman and con artist in the U.S. and Canada. His aliases include Charles Ponci, Carlo and Charles P. Bianchi. Born in Italy, he became known in the early 1920s as a swindler in North America for his money making scheme. Charles Ponzi promised clients a 50% profit within 45 days, or 100% profit within 90 days, by buying discounted postal reply coupons in other countries and redeeming them at face value in the United States as a form of arbitrage. In reality, Ponzi was paying early investors using the investments of later investors.

This type of scheme is now known as a "Ponzi scheme." His scheme ran for over a year before it collapsed, costing his "investors" $20 million.

Ponzi was probably inspired by the scheme of William F. Miller, a Brooklyn bookkeeper who in 1899 used the same scheme to take in $1 million.